Q2 2023 Arista Networks Inc Earnings Call
Welcome to the second quarter 2023, Arista networks financial results earnings Conference call. During the call all participants will be in a listen only mode. After the presentation. We will conduct a question and answer session and instructions will be provided at that time.
If at any time during the conference you need to reach an operator, Please press star followed by zero.
As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website. Following this call.
MS. Liz Steiner has just director of Investor Relations you may begin.
Thank you operator, good afternoon, everyone and thank you for joining us.
With me on today's call are <unk>, Arista networks, President and Chief Executive Officer, and eat up Brennan Arista as Chief Financial Officer.
This afternoon Arista networks issued a press release announcing the results for its fiscal second quarter ending June 32023.
If you would like a copy of the release you can access it online at our website.
During the course of this conference call Arista networks management will make forward looking statements, including those relating to our financial outlook for the third quarter of the 2023 fiscal year.
Longer term financial outlook for 2023 and beyond.
Our total addressable market and strategy for addressing these market opportunities, including AI customer demand trends and supply chain constraints component cost manufacturing output inventory management and inflationary pressures on our business.
Lead time product innovation, working capital optimization, and the benefits of acquisition, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC.
Specifically in our most recent Form 10-Q, and Form 10-K, and which could cause actual results to differ materially from those anticipated by these statements.
These forward looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements. After this call.
Also please note that certain financial measures. We use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges.
We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release.
With that I will turn the call over to Jay Sri Thank.
Thank you Liz I'm happy to ask during July everyone.
We delivered revenues of 1.46 billion for the quarter with a non-GAAP earnings per share of $1.58.
Services and software support renewals contributed approximately 15.2% of revenue.
Our non-GAAP gross margins of 61, 3% was influenced by improving supply chain overheads and higher enterprise contribution.
We do expect gross margins to consistently improve every quarter this year and stabilize in 2024.
International contribution registered a 21% with the Americas at 79%.
As we surpassed 75 million cumulative cloud networking ports, we are experiencing III refresh cycles with our customers.
Gigabit migration in the enterprises 204 hundred gigabit migration into cloud and 400 going to be 800 gigabit for AI workloads.
During the past couple of years, we have enjoyed significant increase in cloud capex to support our cloud Titan customers for the ever growing needs Tech refresh and expanded offerings.
Each customer brings a different business and mix of AI networking and classic cloud networking for their compute and storage clusters.
One specific cloud Titan customer has signaled a slowdown in capex from previously elevated levels.
Therefore, we expect near term cloud tightening demand to moderate with spend favoring their AI investments.
We do project, however that they will grow in excess of 30% annually versus our prior analyst day forecast of 25% in 2023.
The AI opportunity is exciting as our largest cloud customers review their classic cloud and AI networking plants Arista is adapting to these changes, thereby doubling down on our investments in AI.
Arista is a proud founding member of the Ultra Ethernet consoles, Jim that is on a mission to build open multi tender AI networking at scale based on proven Ethernet and IP.
There are a lot of software and E O S consideration for it yet.
Traffic and performance demands are different as it comprises of a small number of synchronized high bandwidth flows making them prone to collisions that slow down the job completion time of AI clusters.
As they connect thousands of Gpus generating billions of parameters repetitive scale called clusters, Arista Eos capabilities must also scale, along with our AI spine and leaf platforms to achieve that consistent performance and throughput.
Arista has been developing U S features such as intelligent load balancing and advanced analyzers to report and rebalance source that can achieve predictable performance.
Customers can now pick and choose programmable package header fields, but better entropy and efficient load balancing of their AI workloads.
Network visibility is also important in the training phase for large datasets to improve the accuracy of large language models.
It is a new AI analyzer monetizing reports traffic counters like microsecond level windows to detect and address micro bursts.
Our AI strategy and platforms are resonating well with our early customers.
Gently in 2023, we are in the middle of trials for backend AI necklace, leading two pilots in 2024.
We expect larger clusters in production deployments in 2025 and beyond.
In the decade ahead, AI networking will become an extension of cloud networking to form a cohesive and seamless front end and back end network.
And the non cloud enterprise categories. We continued to experience good momentum in both data Center and campus, let me illustrate with a few customer wins so.
The first is.
It is an international new transportation win where the customer was seeking to modernize their legacy campus. Their endpoints included large and small campus locations internal communication devices various Iot.
C T V display boards that much more.
Customer mandated a fully automated workflow Arista presented a highly optimized best of class cognitive campus.
Whenever it's just single binary U S image across all campus platforms complete with a universal API and built in automation features.
The customer was set on a path to continued campus modernization.
The next enterprise win involves both data center and campus with advanced E V. P. N L. Three VPN or VX Lan routing architectures instead of the traditional layer two extension.
Distributed Eva sensors, but strategically positioned within the network to capture and analyze traffic at critical points. This zero trust approach emphasizes threat mitigation throughout the network as opposed to relying solely on silo security.
The integration of real time streaming telemetry and visibility yet cause it capabilities proved to be paramount in obtaining this operational acceptance.
The final win wasn't a large public sector.
<unk> redundant data centers to hundreds of campus locations with a large routing environment. They.
They were challenged with complex mpls routing that was hard to operate across the Wan and campus networks.
An upgrade of any magnitude implied several million dollars impacting change controls to touch on all of their sites.
<unk> demonstrated that the customer could use a single sign for both Lan and Wan to dramatically simplify and automate the whole environment within 30 days.
This 80% reduction in total cost of ownership was made possible with Arista is modern cloud operating model.
You can see a recurring theme here across all of these customer wins, which is the power of our platform innovation quality and support with a low tcl and a single cloud vision and U S software stack.
Arista is diversifying its business to transform the enterprise to a modern netbook operating model.
Before I hand to EDA I would like to share with you that EDA is planning to retire sometime next year in 2024.
She has had a stellar career at Arista as our Chief Financial Officer.
That has been our business partner and friend for the past eight years.
She has displayed the Arista way always prioritizing our customers employees and shareholders.
<unk> has demonstrated and delivered both growth and profitability with a very very small G&A investment often only 1.5% of revenue.
These type of pristine financials are so rare in our fast growing tech company and only possible with a shared vision between the CFO and CEO .
Peter Thank you for your steady leadership and contributions undoubtedly we will Miss you next year, when you're going to tell you.
But to you for financial metrics.
Actually that's very tight and an amazing experience working with you and the whole of assisting over the last eight years.
Now back to the numbers. This analysis of our Q2 results our guidance for Q3 is based on non-GAAP and excludes all noncash stock based compensation impacts certain acquisition related charges and other nonrecurring items.
A reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release.
Revenues in Q2, a 1.46 billion up 38, 7% year over year and well above the upper end of our guidance of 1.35 to 1.4 billion.
Services and subscription software contributed approximately 15, 2% of revenue in the corner up from 14, 9% in Q1.
International revenues came in at $304.4 million or 29% of total revenue up from 17, 5% last corners.
This quarter over quarter increase largely reflected a healthy contributions from our enterprise customers in EMEA and APAC and some reduction in domestic shipments of our cloud Titan customers, which were unusually robust in the prior quarter.
Overall gross margin in Q2 was 61, 3% in line with our guidance of approximately 61%.
From 63% last quarter.
We continue to see incremental improvements in gross margin quarter over quarter with higher enterprise shipments and better supply chain costs somewhat offset by the need for some additional inventory reserves as customers refine their forecasted product mix.
Operating expenses for the quarter by $287 3 million or 19, 7% of revenue up from last quarter at $257 5 million.
R&D spending came in at $188 5 million or 12, 9% of revenue.
From $164 8 million last quarter.
Primarily reflected increased head count and higher new product introduction costs in the period.
Sales and marketing expense was $79 6 million a 5.5% of revenue.
<unk> to $75 9 million last quarter and increased head count in product demo costs.
Our G&A costs came in at $19 1 million or 1.3% of revenue consistent with last quarter.
Our operating income for the quarter was $606 5 million or 41, 6% of revenue.
Other income and expense for the quarter was a favorable $31 $6 million and our effective tax rate was 21, 4%.
This resulted in net income from the corner $501 2 million or 24, 4% of revenue.
Our diluted share number was $16 5 million shares resulting in a diluted earnings per share number for the quarter of $1 58 up 46% from the prior year.
Now turning to the balance sheet cash cash equivalents and investments ended the quarter at approximately $3 7 billion.
In the quarter, we repurchased $30 million of our common stock at an average price of $37 $2 per share.
Now repurchased $855 $5 million or 8 million shares at an average price of $107 per share under our current $1 billion board authorization at speeds of $145 million available for repurchase in future quarters.
The actual timing and amount of future repurchases will be dependent on market and business conditions stock price and other factors.
Now turning to operating cash performance for the second quarter, we generated approximately $434 1 billion of cash from operations in the period, reflecting strong earnings performance, partially offset by ongoing investments in working capital.
Yeah. So it was came in at 49 days down from 57 days in Q1.
A strong collections quarter with good linearity of billings.
Inventory turns were one point to time down to 1.3 last quarter.
<unk> increased to $1 9 billion in the corner up from $1 7 billion in the prior period, reflecting the receipt of components from our purchase commitments and an increase in switched related finished goods.
Our purchase commitments at the end of the quarter with $2 2 billion down from $2 9 billion at the end of Q1, we expect this number to continue to decline in future quarters as component lead times improve and we work to optimize our supply positions.
Total deferred revenue balance was 1.085 billion down 4.0 92 billion in Q1.
The majority of the deferred revenue balance as services and related for lasers and directly linked to the timing in term of service contracts, which can vary quarter by quarter basis.
Our product deferred revenue balance declined approximately $33 million from last quarter.
How's payable days seven days up from 55 days in Q1, reflecting the timing of inventory receipts and payments.
Capital expenditures for the quarter were $11 6 million.
Now turning to our outlook for the third quarter and beyond.
To recap global supply chain disruptions over the last couple of years necessitated elongated planning horizons and customer demand signals. The corollary is also true improving lead times and now driving a sharp planning horizons and demand signals delaying when customers need to place new orders.
It's particularly true of our cloud Titan customers following a year of elevated repurchases snog rapidly changing technology, roadmaps and priorities before providing visibility to future demand later in the year.
On the supply side, we expect to continue to ship against previously committed deployment plans for some time targeting supply improvements wherever it's needed, but also careful not to create redundant customer inventory.
In spite of the return to shorter lead times.
We are executing well with graduate into mentioned improvements to our transplant three outlook now calls for year over year growth in excess of 30%.
On the gross margin front would you expect continued progress towards the end of the year affecting supply chain and manufacturing benefits, while maintaining a reasonably healthy contribution.
Now turning to spending and investments we continue to monitor the overall macro environment carefully prioritize our investments as we move through the year. This will include a focus on targeted hires in R&D and go to market as the team sees the opportunity to add talent.
On the cash bonds by we'll continue to focus on supply chain working capital optimization, you should expect some continued growth of inventory through the end of the year.
Also as a reminder, our 22 minutes III tax payments have been deferred to October and will represent a significant use of cash in that quarter.
With all of this as a backdrop our guidance for the third quarter based on non-GAAP results and excludes any noncash stock based compensation impacts and other nonrecurring items is as follows revenues of approximately 1.45 to $1 5 billion gross margin of approximately 62%.
Operating margin at approximately 41%.
Our effective tax rate is expected to be approximately 21, 5% with diluted shares of approximately 318 million share I will now turn the call back to Ms Lis. Thank.
Thank you Peter we will now move to the Q&A portion of the Arista earnings call to allow for greater participation I would like to request that everyone. Please limit themselves to a single question. Thank you for your understanding operator take it away.
Thank you we will now begin the Q&A portion of the Arista earnings call in order to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. It is star one again, we ask that you pick up your handset before asking questions in order to ensure optimal sound quality. Your first question comes from the line of.
William Inc, with Goldman Sachs.
Hey, This is Mike King from Goldman Sachs. Thanks for the question.
Just wondering if you could talk a little bit more about the outlook for in excess of 30% year over year growth this year on revenue.
Whats gotten better relative to last earnings call.
If you could talk about it in the context of cloud Titans versus enterprise that'd be helpful. I'm, just trying to recognize reconcile the revenue upgrade versus the commentary about.
Near term cloud Titan growth moderating. Thank you yes.
Yeah, Thanks, Mike I think.
It's pretty clear that some quarter over quarter, our enterprise momentum continues to get stronger and better.
Our cloud is strong however, it's got two components now.
Classic cloud networking and then D G I.
So we're reconciling how we double down more on AI, which you guys are getting stronger and stronger about and even on the cloud you you know that the last two years have just been out of this world and phenomenon, so while its moderating but still pretty good.
Yeah.
Thanks, Mike Thanks for sharing.
Session.
We'll take our next question from Tim long with Barclays.
Thank you Jamie.
Sure Yeah, I was hoping you could dig more into some of the comments around AI. It sounds like there's a large pipeline there and you talked about kind of the stages with 2025 being a big growth.
Area I'm curious if you can just talk a little bit about a few things related to that one.
Do you see that the move to AI expanding or diversifying.
More your cloud Titan or your cloud customers and second can you talk about kind of the next year or two that the entire <unk>.
Fin a ban versus Ethernet debate I think you guys have been.
Filing some Ethernet.
<unk> clusters can you just give us an update on how you think that.
<unk>.
Competition between those two technologies.
How do you think that's going to play out thank you.
Okay. Thank you Tim maybe my answer will be shorter than your question, but I think the gist of what I'd like to first of all say is majority of it is just participation has been in the front end of the network right and we're getting a chance for the first time ever to play in the backend. So when we think AI. There's clearly some ramifications of bandwidth on the front end of the next level.
We're not counting that so we're truly thinking of something that's incremental brand new a lot of work to do in testing proving pilots trials before we get into production.
Today, I would say in the back end of the network did not basically three classes of networks. One is very very small networks that are within the server when customers use pcie's EXL, there's proprietary and video specific technologies like N V links that are used in does not participate then there's more medium clusters, you can thing generative.
Yeah, mostly inference.
They may well get built on Ethernet for the extremely large clusters with large language training models, especially with the advent of chat GPT three and four you're not talking about not just 1 billion parameters, but in aggregate of Chilean parameters and this is where Ethernet will shine, but today the only technology that is available.
Customers as Infiniband. So obviously infiniband may 10, 15 years as to linearity in in HBC environment is often being bundled with the Gpus, but the right long term technology is Ethernet, which is why I'm. So proud of what the until you can net consortium and a number of vendors are doing to make that happen. So near term, there's going to be a lot of.
Infiniband and Arista will be watching that outside in but longer term. There is still will be participating in an Ethernet me I misspoke.
And.
Neither technology I want to say, we're perfectly designed for AI.
Infiniband was more focused on HBC and Ethernet was more focused on general purpose networking. So I think the work we are doing with the UEC to improve Ethernet for AI is very important.
Okay. Thank you that's very helpful.
We'll take our next question from meta Marshall with Morgan Stanley .
Great. Thanks I'm just.
Revisiting kind of the cloud Titan commentary.
No.
Does the change that you were seeing me that they're completing kind of one upgrade cycle. There might just the time between the next upgrade cycle or are there real changes to kind of current deployment plans or kind of deployment of the current upgrades.
Alright.
Pardon me mentally addressing the question to eat out.
I guess that was it.
It drives me to whoever wants to answer about the kind of commentary on the changes in the cloud Titan order.
Sure sure.
Tom.
Yeah.
When you look at the cloud customers in the last few quarters is firstly.
Do you believe thats been a rotation into AI.
It's not that they're done with the upgrade so this is for the upgrades, but they have to re prioritize their business and their deployment.
You've seen the competitive battle between the largest or the largest items in the world trying to get ahead.
But we see signs of that point in the future, we believe there'll be back to adding and refreshing.
Infrastructure as well.
Okay.
You know I always like that.
And you can only do so for so long eventually you have to eat so I think we will see a nice mix of V. I N classic cloud networking overtime, yeah, and I think that the lead time improvements have kind of facilitators them waiting.
For a little bit longer than what we've gotten used to over the last couple of years.
But I think again, that's kind of we're going to start coming within lead time here pretty soon.
Yes.
Thank you.
Thanks Nina.
We'll take our next question from Ben Bollin with Cleveland Research.
Hi, good evening, everyone. Thanks for taking the question.
Congrats I had a question for you.
I was hoping you could speak to.
Where do you see lead times presently and you talked about.
They are taking a little bit more.
<unk> approach to inventory levels that customers could you talk about.
Some strategies that you employ to manage that and where you might see where you think inventory levels are within those accounts. Thank you.
Yeah, I think look the lead times are mixed across products.
Our goal certainly is to try to get back to like a six months lead time here.
Well, maybe the end of the year or certainly early next year.
The commentary around customer inventory and so we've been very diligence all the way through the process and supply chain processes.
And to make sure we understood demand when it showed up in that it was being put into reasonable deployment schedules and deployment plans and we just wanted to continue to do that as we come through the other side of arena that whole supply chain disruption. So it's really more understanding kind of what customers need when they need it and again being able to prioritize.
And make sure that we understand that so its really a continuation of what we were doing honestly on the other side of the supply chain. When you have these.
We ask this kind of accelerated demand and then we were very focused on deployment schedules and timing and this is just the other side of that again, making sure we understand what's happening.
Thank you.
Yeah.
We'll take our next question from Antoine Gabon, with New Street research.
Hi, Thanks for taking my question does that give you a bit of a longer term question, but can you. Please provide an update.
On the opportunity at Hyperscale is beyond your two largest customers does the accelerated deployment of AI clusters potentially open the door to business with the other two hyperscale <unk>.
As the complexity of the networks is increasing rapidly.
Sure.
No.
This gets us very often Harvard MBA.
And we continue to do well with them.
I mentioned before not all if items are the same in terms of size. Some are small and we do very well with them, but they're just not as big as our two largest customers and.
And others will have the potential is still doing very well the technology technologically with them.
But we haven't seen the opportunity materialize, it's not like they're losing so anybody just nothing has changed.
We continue to invest with them and we believe the opportunity is still ahead of us.
I exactly answered I think the way to look at our AI opportunity is it's this 10 years ahead of us and we'll have early customers in the cloud with very large datasets are trialing. Our Ethernet now and then we will have more cloud customers not only tightened but other high end tier.
Tier two cloud providers and enterprises with large data sets that would also try to us over time. So in 2025, we expect to have a long list of customers of which cloud Titans will still end up being some of the biggest but not the only ones.
Thanks Anton.
Our next question comes from Amit <unk>.
With Evercore.
Oh, yes.
Thanks, and congrats on a nice quarter here.
I guess my question is really you know there's been a fair bit of debate among investors on what does come to 'twenty four looks like Arista and the fear I think always it could look like come to 'twenty. When you have some cloud digestion.
Realize it's really early for you to guide 24, what do you sort of think about the puts and takes into next year that'll be helpful. And then maybe Jeff you could talk about how do you think Arista is different today versus at the time, the 19th time to 'twenty time frame that would be helpful.
Yeah, No. That's a really good question stay tune for our 2020 full guide when we have our analyst day sometime in November , but quantitatively speaking, they're very different company today.
Bank three years ago.
Clearly, we've doubled down on our cloud Titans and you you know that theyre getting stronger and stronger, but even in the cloud Titans answer and the team have worked to have a number of use cases. It isn't just one and the addition of AI to that use cases, just gave us a whole lot of broad opportunities from front end tobacco right. So to me the holistic.
Seamless cohesion between the front end and back end will get even more important as time goes on and cloud Titans.
We also see that the stronger in tier two providers and of course, the broader enterprise. Both of these were not as strong for US three years ago and they also represent opportunities, but as you know they represent campus routing classical data center opportunities and allow us to go target is much larger Tam.
Again, two years ago. It was probably 30 billion three years later, it's well north of 50 billion. So I feel we are much more diversified and was deeply appreciate Eminem you got a lot more can do beyond that.
Okay.
Thank you Amit.
We'll take our next question from Tal Leone with Bank of America.
Hi.
To ask you a tough one before you go so you have a good thanks for the.
Risked a few years.
How much of the growth. This time is coming from Brett growth drove down can you give us some.
Information about the order trends rather than revenues and the reason why I'm asking you. This because your guidance for <unk> is 25% growth when I look at <unk>, which the implied 11%. So there is a sharp deceleration in growth in <unk> and I'm wondering if it's a function of backlog and of elevated backlog. Thanks.
I mean look we yeah, we haven't talked about backlog in orders I think we've talked more just in terms of deployments and deployment thoughts and if you think back to that.
In my commentary I mean, we do believe that there are ongoing deployments that will go well into 2024. So it's not again I don't necessarily sign up just the terminology of the backlog and the drawdown et cetera, because it's just.
Given how the orders and the patterns of yards is very difficult to talk in that language right, but I think in terms of deployments you will have deployments that are already planned and scheduled to enter into 2024 I think we're taking a part of recorded through the end of the year, but I would still go back to my kind of incremental.
Look at it kind of incrementally quarter over quarter and continued to show some improvement.
We guide to Q3, so Q4 is.
Now it takes some seminar kind of incremental improvement into Q4, and I think that's the way to think about it for now.
But again I don't know that it's we are commentary on kind of demand and lead time that is right I mean as lead times shorten you will see some period of time, where customers don't need to place orders until you get back into the prime and that dynamic is certainly there.
And as we get closer to the end of the year, we will get more visibility into next year.
Tom I think so.
I know you asked a difficult search victory for.
So the difficult question look it's it will.
We'll know more as time goes on and we think the business is strong and whether that comes through strongly in 24 or 25 or somewhere in between you can see right and the reality is it'll be difficult to repeat the last two years.
Exceptional cloud Capex for cloud networking, so as they go through that deployment and as they look at AI and as we bring in the enterprise and tier two cloud we've got a nice mix of things.
And I urge everyone to think of our business. As you know has always alluded to not in one quarter or even one year, but really a three year CAGR.
And I think a three year CAGR will continue to be in double digits and good numbers.
Great. Thank you.
So.
We'll take our next question from Sebastian <unk> with William Blair.
Oh, great. Thanks for taking the question can you maybe just update us on the visibility in your customer base is it still around six months or are we now down closer to three months and maybe just longer term do you think that generative AI can help improve that visibility.
From where it's historically been just given that many of these hyperscale or as have we.
It seems like decent visibility into a pretty robust pipeline over the next few years.
Yeah, that's a really good Sebastian I you know since we have so many products in the mix and to break your question into visibility across multiple areas of enterprise that would say six to 12 months.
Generally speaking in the cloud given the reduced lead times on classic cloud networking, it's less than six months. However on AI. It is greater since it's a 90 cycle and you have to do a lot more joint development.
So you can think of it as you know three migrations going on with different visibility patterns.
Great.
Yes.
We'll take our next question from stomach Chatterji with J P. Morgan.
Yeah, Hi, thanks, Thanks for taking my question, maybe if I can shift gears here a bit to enterprise Joshi and obviously.
Obviously, you're talking about the slowdown on the cloud side you'd have it going into 2024, but when you look at enterprise. How do you think about sustaining a group III slowdown in that group III into 2020 four but what are you seeing in terms of autos on that front.
Visibility into demand.
Thank you.
Look I think somebody that's been an area that can feel pretty good about it and that's an area of great execution from onshore, Chris Schmitt Ashman and the entire team, where we have really diversified our business.
Globally in the enterprise, but not just in the high end financials.
And just about every major vertical healthcare transportation public sector education banks insurances. So I see an enterprise you know barring any macro issue, which is the thing we were always worried about for 2024. So if macro doesn't let is gone and it's going to have to worry about the economy. We will have a strong year in enterprise.
Thank you.
We'll take our next question from Aaron Rakers with Wells Fargo.
Yes, Thank you for taking the question.
I wanted to ask just on the product cycle cadence.
There's a lot of focus from one of your key component suppliers in the merchant silicon side around 51 point too.
We're a bit silicon and obviously supporting 800 gig cycle I'm curious of how do you think about the timing of that when do we start to see them materializing deployments of 800 gig and maybe that's tied to AI, maybe it's not but just curious of when that cycle. You believe really starts to kick in.
Okay.
Alan.
We had the same discussion, but the world went to 400 gig switching from 100 to 400 and the reality was the customers continue to buy both 104 hundred for different use cases.
51, <unk> 800 gig, especially being fooled by that.
So we anxious to get their hands on it moved the data as quickly as possible and reduce the job completion time.
So you'll see early traction there.
C. A tertiary mentioned culturally in 24 going into volume in 'twenty, five and that should be the ramp will follow 4800 gig, but that does not mean everything but just for the last few years.
400 gig for Dci or the science and so on for classic dose dose is going to get upgrade rates very big I think that's going to be a longer cycle. So you will see 100, 200 408 hundred gig deployed and Baidu has been entered that segment in 'twenty four 'twenty five.
Thank you.
Thanks.
Thanks.
We'll take our next question from Matthew <unk> with Deutsche Bank.
Hey, Thanks for taking the question.
Just wondering on the supply chain, if you could talk about how that's evolved over the last quarter and as it relates to gross margins I think your messaging incremental improvements in <unk> and <unk>.
Is that purely a function of easing supply chain or is there also maybe greater relative contribution from enterprise relative to cloud Titans envisioned in the second half of the year as well thanks.
I mean, we've definitely seeing improvement on the supply chain side, we're seeing improvements with great improvements with.
Some of the expedite costs those are the things that we were dealing with them.
So we're kind of inventory that now we're releasing them. So I think we're coming out from underneath that.
Yeah. There is some small shifts in mix as well, but it's still a good strong cloud mix.
This quarter this year or so.
It's not like we're back to a heavy enterprise mix is playing a much smaller part.
A very healthy kind of cloud mix in this in this year, that's more where you can back out or.
Supply chain stuff that we incurred in the past.
No I wanted to give a shout out mark.
Bernhard <unk> senior VP of manufacturing and John Mccool, both in actual team have done a fantastic job of optimizing the supply chain. So those improvements are really playing a role in a quarter to quarter gross margins yes.
Thank you.
Yes.
We'll take our next question from James Fish with Piper Sandler.
Hey, Thanks for the question.
Just wanted to follow up around some of the prior questions asked as it might have been asked already but I know you guys aren't talking about visibility and don't discuss backlog, but is it still fair to assume that we should think about you guys returning to a normal environment from a supply perspective in the early part of next year and I believe you've talked.
About.
Underneath pursuing that Hyperscale or is your cloud Titans grow double digits for this year is it still fair to think about that kind of level for 2023.
Yes.
Absolutely right and I think.
Yeah, we kind of forget the cloud is still an important part of translating to scream like Brazil.
We're still executing on deployments and planning that we did some time back right all the way through this year. Our cloud is still a significant piece of the of the business in 2023.
Yes, and James just to confirm we expect a more normal setting it in 2010 before in terms of lead time.
Youre right to assume that.
Thanks, Tim.
We'll take our next question from Simon Leopold with Raymond James.
Thanks for taking the question I wanted to see if you could maybe do a little bit of unpacking in terms of what's driving your enterprise business in that I think the conventional wisdom is that enterprises are challenged by recessionary forces on the cycle and then the secular challenge around public cloud adoption means.
So what do you see happening how much of this successes related to market share gains how much to general cycles products et cetera, if we could unpack the enterprise traction. Thank you.
Sure Simon.
Well of course, we had market share gains that is the result of our enterprise traction I would say, but if you ask me why are we winning in the enterprise and I would say number one from.
From an alternative perspective, our customers haven't had one for a very long time and you haven't had a high quality high support.
No.
Friendly software experience a common D spine architecture across their data center campus routing in a long long time, so I think the architectural shift in the enterprise to move to a modern cloud operating model is the number one reason.
That Arista has been chosen because they are seeking our architecture for that quality of experience in fact honestly and I were just talking about the call.
Use the word cloud if I am not in it.
Drinking right now and our high end enterprises are really looking for the cloud principles, but however, long that finished in terms of the shift between workloads in the cloud and workloads on the enterprise it depends on the customer you're still seeing some of the mid market customers want to move their ecommerce workloads on the cloud, but a lot of their mission critical applications do you on the premise.
Our hybrid strategy continues to dominate the enterprise decisions for the data Center secondly, our entry into the campus and routing as well as zero Trust security of 790 et cetera is adding more newness to the cake saw product depth and breadth is getting better and better so the cloud operating model the product.
And now actually we've been at it now for what do you see them sort of three to five years, maybe so, especially in the United States. We got more work to do internationally I would say have you been engaging with these customers I remember when he and I had a question I wanted to say five years go manage human bite and I was wrong and she persuaded me to invest more in the enterprise.
So I think all of these things have gone into really making us who we are in the enterprise.
We are a gold standard and then you have a seat at the table there.
Thank you.
Thank you Simon.
We'll take our next question from David <unk> with UBS.
Great. Thanks, guys for taking the question and congratulations ETA.
I just want to go back to the point and maybe help bridge the 23% to 24% to 25 commentary that Jason mentioned sort of strong double digit growth I think in the past you've talked about 15% growth across cycles and I'm just trying to think through is there enough in trials and pilots in 'twenty four to kind of get you to that.
Kind of mid teens growth over the next couple of years and if not does that mean that your enterprise business has to remain incredibly robust in 'twenty four.
Upwards of you know high teens to low 20% growth next year, I know youre, not giving guidance, but trying to kind of walk the bridge to get from where we are today to 'twenty, five where you're going to start to see more widespread AI deployments from a revenue recognition perspective. Thanks.
So now you're waiting to go to 25 as well.
I think I don't think we're ready to do that so that's a really good conversation from the analyst day honestly I think.
We obviously, we're very focused entirely on century reiterated here around the businesses, there's a lot more robust with many different drivers.
As you go through that period powered will ebb and flow, but it's still a healthy business that has been a healthy business through the cycle. So I think we've got a lot of the building blocks, but how we go to the assembled on maybe will pay for that after the analyst day and I'm sure the legal claim more.
But rest assured that we are aiming.
At least double digits next year.
And so we'll go from there.
Great Thanks, guys and congrats again.
We'll take our next question from Erik <unk> with JMP Securities.
Yeah. Thanks for taking the question.
Maybe this is for onshore.
Can you just walk us through kind of how the cloud Titans work, we hear a lot about them buying volumes of Gpus right now.
I would point to to do their purchasing of GPU translate into their demand for for switches.
How does it work with the trials and so on and so forth.
Sure.
No.
There is no uniform recipes, but in general when they're buying GPU.
Both to connect.
It could be off a few quarters, depending on their timing of deployments to their build the network.
Yes.
These are very large.
And then it takes them a couple of months, sometimes a quarter or more to fine tune the cluster and benchmark in test everything before it is actually released to production.
So you can think of that sort of the basis. A couple of months couple of quarters minimum before you can get there sometimes it adds up to about a year before you really ramp into production.
Okay. Thanks.
We will take our next question from George Notter with Jefferies.
Hi, guys. Thanks, a lot.
I wanted to ask about your comments about 2025 participation in AI.
Could you walk us through sort of the milestones that you see between now and then in terms of increasing our richest participation certainly there is new product development, there's market acceptance I presume.
And then also I assume that you participate today with inferencing applications and that's by and large done on Ethernet I think what we're really talking about is just training correct. So.
Any more color there would be great. Thanks.
Yes, George So I think you can look at 2023 as really a year of planning for AI, because as I've said.
There's tons and tons of GPU is being purchased and then the question is how is it being connected so depending on whether they're small medium or large different technologies, but I'm going to stay focused on the large because that's the biggest problem.
You are right to say some of them may be Ethernet or even a non networking technology, just deny or a bus.
Smaller networks, but generally speaking we're focusing on things that are much larger than you know 200 or even a thousand GPU. So that's the pricing. So a lot of planning is going into that.
And the planning basically is how do they get to defuse what is that application. What is the size of the cluster when does the time what is the large language model dataset.
And what does that network Foundation.
In some cases, where they just need to go quick and fast as I explained before it would not be uncommon to just bundle they gpus within existing technologies I can put it that way.
I didn't really really rolling off into 2025, Youre doing more trials and pilots with us to see what the performance of this to see what the drop is to see how many they can connect what's the latency.
And what's the better entropy once the efficiency et cetera, that's where we are today now we expect next year. This will translate to some what I call pilots because majority of them will happen in 'twenty five but in 'twenty four you'll start seeing what do you see onshore maybe you know 4000 to 8000 GPU something that's right in that range and that's been joking.
4000 to 8000 Gpus at about 400 gig type clusters, we can actually put some production workloads on it so I call them smaller planets, but the real test of why are you buying these expensive Gpus is in 2020 five when you want a guy not just for two eight but 30050 thousand maybe even 100000. This is my 20.
He finds so critical and taking testing and taking out all the kinks.
Out of that.
Net Gpus on Netflix is important because your network is still a good network is so pivotal to getting the most out of your Gpus. If you have idling cycles from the Gpus you wasted.
If not millions of dollars and so I think the next two years, that's crucial to getting the most out of these expensive Gpus and that's where the Netflix really comes.
I'm sure if I can add one more thing to.
What are the milestones to get to these 2025 loads is if youre dependent.
One key milestone that has nothing to do with GPU is oral switches.
Which is does the customer have enough power and the site is ready to deploy as many megawatts a gigawatt of capacity.
As you know getting a 500 megawatt site. It takes a couple of years, which is why this is the slow ramp. This is not suddenly thought onto kian doesn't contribute yeah really good point simple.
Simple things like power and space I still vital.
Thanks, Josh.
We'll take our next question from Karl Ackerman with BNP Paribas.
Yes. Thank you.
G III theres been some investor concern that Hyperscale customers may focus more on white box solutions for 800 gig it's been in the 400 gig cycle.
We're aware that some of your customers continue to adopt a dual sourcing strategy, but if you could just comment on the potential for an upgrade cycle as well as reuse risk on the transition to 800 gig it'll be very helpful. Thank you.
Sure so.
As you're probably well aware the white box question has remained in the Dymista as the one of the most popular questions asked right from the time of our IPO.
It's a 10 gig 40 gig 100 gig 400 gig on are you asking at 800 gig I think there will always be an element of white box. If somebody is looking to build something to throw in some quick traffic, but for some of these most mission critical networks.
It's less about the box and more about the software stack and how much performance availability power.
You really get out of this so the cost of putting into box. If you save something you could even say something is fog dwarfed by the total <unk>.
Opex you need to make that box work. So we continue to believe that we recorded this with a white box and some of our cloud Titan customers. We will continue to run both Sonic and ethos in the case of Microsoft and meta along without U S. A.
But at the end of the day, but it's a white box or a blue box, it's the software stack that really win.
Thanks, Todd operator, we have time for one last question.
Thank you, we'll take our last question from Ben Reitzes with Melius research.
Hey, Thanks, a lot for sneaking me in there congratulations Jay Sri and team I wanted to ask about enterprise again I.
Thank you.
The comments you made around cloud Titans were all things that people were able to detect but the enterprise just seem so much better in terms of the performance in the guide. So you mentioned that you gained share but.
The market pick up as well and did you do you see that market pick up in demand in the enterprise sustaining into 'twenty four.
And just kind of more color around enterprise and whether the market picked up in addition to you gaining share.
Hey, Ben Thank you what do you mean by the market pick up I didn't I don't fall a little attention.
The demand pick up because the enterprise outperformance was quite a surprise and clearly that the cloud Titans commentary was.
As does everybody was able to predict after the last conference calls this week so.
Yeah, Yeah. It was it all market share or is the market picking up as demand picking up across the board.
I would say to you that probably our enterprise demand has always been strong and not subdued for some debt. However, dwarfed by the excellent. So far cloud performance you didn't notice it and now you're noticing it.
Thanks Ben.
This concludes <unk> second quarter 2023 earnings call, we have posted a presentation, which provides additional information on our results, which you can access on our investors section of our website.
Thank you for joining us today and thank you for your interest in Arista.
Thank you for joining ladies and gentlemen. This concludes today's call you may now disconnect.
Please wait the conference will begin shortly.
[music].
Yeah.
Yeah.
Yeah.
Yes.
[music].
Yeah.
Yeah.
Yes.
[music].
Uh huh.
[music].